Thai Union Frozen Product

Thai Union Frozen Product Plc (TUF)

1Q13 recap. TUF did poorly in 1Q13 with net profit of Bt674mn, +10% QoQ but -54%
YoY; removing extra items and FX gain gives a core profit of just Bt124mn, -80% QoQ
and -90% YoY. Behind the sad showing was weak gross margin for both tuna and
shrimp, together accounting for 71% of 2013F sales: tuna margin was slashed to 10% in
1Q13 from 14.83% in 2012, and the margin for shrimp & related business halved to 6.5%
in 1Q13 from 12.06% in 2012.
Tuna business weaker in 2013 than in 2012 – The tuna business, which provides
49% of revenues, has been buffeted by fluctuating fish prices coupled with lower sales
volume, together weakening margin. The sharp rebound in raw tuna price to a record
high of US$2,325/tonne, or an increase of 22% from the low point of US$1,900/tonne at
the end of 2012, made a big dent in customer purchases. We believe TUF’s tuna sales
volume improved in 2Q13F, as customers likely ran out of low-priced inventory carried
over from 4Q12 and thus needed to restock. However, we expect margin in 2Q13 to
continue poor, with a real turnaround evident in 3Q13. The 2013F average gross margin
for tuna is expected to inch back up to 13.03%, with a rebound to 15% in 2014F.
Shrimp and related business facing the EMS disease - The gross margin for the
shrimp business, contributing 21% of revenues, continues to be hurt by the ongoing
Early Mortality Syndrome (EMS) epidemic. This has resulted in a shrimp supply shortage
and price surge, pushing costs up. The disease slashed annual Thai shrimp production
to 250,000-300,000 tons from 550,000 tons. Shrimp is heading for another barrier next
January (2014) when GSP on processed shrimp exported to Europe will be cut and
import tax raised to 20% from 7% for cooked shrimp and to 12% from 4.2% for frozen.
Initiate as Neutral. TUF has not performed well for two quarters in a row - 4Q12 and
1Q13 - but we believe things are looking up and expect gross margin to improve in
2Q13F to 12.3% from the average of 10.9% in 1Q13, with a core profit of Bt400-500mn.
We expect quarterly core profits to improve to Bt800m-Bt1bn in 2H13 and gross
margin to rise to 14-15%, with the year’s average gross margin of 13.13%. Leading the
turnaround will be higher tuna sales volume and gross margin, the high season in 3Q,
improved operations at the US Chicken of the Sea operations as well as MW Brands in
Europe, plus increased shrimp output and shrimp feed sales as shrimp supply begins to
return in 3Q13. We also expect pet food margins to widen further in 2H13. We tag this
stock Neutral with a target price of Bt60, based on PER of 14x in 2014